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Gold/Mining/Energy : Oil & Gas Price Economics -- Ignore unavailable to you. Want to Upgrade?

To: kingfisher who wrote (304)	10/9/2000 5:39:25 PM
From: Ed Ajootian	Respond to of 350

Strategic Oil Reserve Release: Strategic Only in a Political Sense By Christopher Edmonds Special to TheStreet.com Originally posted at 8:20 AM ET 10/6/00 on RealMoney.com As the price of crude slips toward $30 per barrel, consumers are hoping the decline will lead to lower prices for heating oil and natural gas as winter quickly approaches. After all, that seems to be the promise of the Clinton administration in releasing 30 million barrels of black gold from the Strategic Petroleum Reserves. But don't get your hopes up. As we have noted here before, time will prove the move to be long on political rhetoric and short on meaning to your wallet. While oil prices have tumbled, the affect on both heating oil and natural gas prices has been more muted. And with winter fast approaching, the future of heating fuel prices is more dependent on current inventories and the weather than long-winded politicians whose plan may very well backfire. It's all About Inventories The chart below tells you everything you need to know about the relationship between distillate inventory and crude oil prices. As crude prices rise, inventories fall. Inventory vs. Crude Prices The relationship shown here suggests that to get back to the inventory levels of October 1999, crude prices would have to drop to less than $22, something nobody projects will happen until late next year. Moreover, to get to the more comfortable levels of 1998, crude prices would need to drop well below $20 per barrel. Don't forget the heating oil scare last January and February, during a very mild winter. Why the inverse relationship? The answer is in the economics. As crude prices push higher -- especially when there is an expectation that prices will fall in the future -- refiners are reluctant to produce and store extra distillate products. For as crude prices fall, competitors will reduce prices on distillate products, forcing those holding high-cost inventories to sell at a loss. Conversely, that's why inventories rose as prices dropped in 1997-98; refiners stocked up on low-cost distillate products to sell at higher prices later. This doesn't mean refiners are hoarding supply now. In fact, refiners continue to run at full capacity, attempting to churn out enough heating oil just to meet demand for the upcoming winter. That, as we have said before, is another reason release of crude from the SPR is likely to have little impact on availability of heating oil this winter. However, traditional summer stock buildup appears to have slipped this year as oil prices pushed higher, something that isn't likely to be corrected anytime soon. That's especially true given that routine plant maintenance will reduce domestic refining capacity by about 1 million barrels in October. In fact, a look at the data suggests that distillate inventories may shrink rather than grow if crude prices continue to hover around $30. Indeed, the last oil price peak -- $23.11 in October, 1996 -- dropped distillate inventories to 114.7 million barrels, roughly today's level with $30 oil. That doesn't bode well for short-term inventories. And one more irony may cause consumers to scratch their heads. As the SPR release has lowered petroleum and heating oil prices in the U.S., the disparity between domestic and international prices has widened. That could spur refiners to export lower-cost heating oil to higher-profit markets abroad. "The result could be lower inventories of heating oil in the United States," says Jeff Dietert, an analyst with Simmons & Company in Houston. "That could mean higher prices into winter." Not Such a Cool Problem Reports this week from the American Petroleum Institute and American Gas Association that stockpiles of crude and natural gas grew last week helped push prices to two-month lows. API reported crude stocks rose by 3.4 million barrels the last week of September, compared with estimates of about 2.5 million. Prices have reacted to the news: Crude dropped from highs of more than $37 to $30.50 on Thursday; heating oil has dropped from above $1.00 to just over $0.92. Similarly, AGA reported an injection of 78 billion cubic feet (bcf) of natural gas for the same week, bringing stocks to 2,480 bcf, or about 75% full. Traders expected the injection to fall slightly below 70 bcf for the week. That news has caused natural gas prices to drop as well, from highs pushing $5.50 per million British Thermal Units (MMBtu) to current levels below $5.15 MMBtu. However, winter weather may soon dampen the good news. A significant cold snap is likely to put the Midwest into a deep freeze this weekend, pushing temperatures to 20 degrees below normal over the next four to five days and significantly cooling the Northeast, as well. Meteorologists at Weather.com say the New York and Chicago "weather pattern will resemble that of late November." And, according to one industry observer, that doesn't bode well for the winter that follows. "The early arctic blast will also serve as a confirmation of several autumn/winter weather forecasts that have predicted a normal, even below-normal cold season ahead," wrote Scott Speaker of the Energy Intelligence Group in a report Thursday. That, says one energy commodity trader, means higher prices. "If we get a cold snap, the positive psychology of the SPR is gone. From there, prices will only go up with every cold day, especially in the Northeast, where inventories will begin to shrink." You wonder if Bill and Hillary have hedged their heating oil prices for the long New York winter?